What Is a Buy-Sell Agreement?

The process of estate planning can be a bit confusing for small business owners, especially if there are partners in the business. How would things play out after the passing of one partner? This type of situation is often addressed through the creation of a legal device called a buy-sell agreement. Let’s look at the details.

Buy-Sell Agreements

We will explain by way of example. For the purposes of our example, you are one of three partners in a small business. The business is quite successful, and the business shares are valuable. In fact, your share in the business is your single most valuable asset. After you pass away, you want the value to be spread around among multiple different inheritors.

How can you facilitate this? If you simply allow your family to sell your share after your passing, your partners would be forced to deal with the outcome whether they liked it or not. The same situation would apply to you if you were a surviving partner, and this loss of control can be disconcerting.

This is where a buy-sell agreement could enter the picture. With the buy-sell agreement called the cross purchase plan, each partner would take out a life insurance policy on every other partner. The value of the combined policies would equal the value of a predetermined share in the business.

Upon the passing of a partner, the other two partners would receive their insurance policy proceeds. These proceeds would be combined to purchase the share of the business that was owned by the deceased partner.

The surviving partners can continue to run the business, and the family would have liquidity to spread among multiple different inheritors.

There is another type of buy-sell agreement called the entity purchase or stock redemption plan. This type of buy-sell agreement is very similar to the cross purchase plan. The primary difference is that the business entity itself takes out the life insurance policies.

A buy-sell agreement can provide a very good estate planning solution for you if you are involved in a small business partnership, and you can obtain more detailed information if you discuss your objectives with business succession attorney.

Your attorney will gain an understanding of your family dynamic and the nature of the business, your questions will be answered, and the appropriate recommendations will be made. In the end, you can go forward with a solid plan that satisfies all of your estate planning objectives.

Timothy P. Murphy is an estate planning and elder law attorney whose practice emphasizes helping people to build, preserve and pass on their wealth. He works with his clients to accomplish their goals while avoiding unnecessary court proceedings and minimizing or eliminating exposure to death taxes.

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